Addnode Group AB (publ)

STO:ANOD B

Earnings Call Transcript 2020-Q1

[Johan Andersson, President & CEO]

Welcome to the presentation of Addnode Group's First Quarter 2020. Let's start the presentation by moving to Slide 2. Me speaking is Johan Andersson, CEO of Addnode Group; and later, you will also be joined by Lotta Jarleryd, our CFO. And together, we will present our Q1 report for 2020. So very much welcome.Let's move to Slide 3 in the presentation. This is an audio call that we will present a result for Q1, and you will be able to mail questions, and there will be a Q&A session later in the presentation where we will pick up your questions, and we will address them in the later part of the presentation. So please mail into [e-mail]'s move to Slide 4. Before we get into the presentation of the Q1 results, I would like to give a short introduction to Addnode Group for -- especially for you who are new to the organization and the company. Addnode Group, we acquire, operate and develop cutting-edge enterprises that digitalized society. And we'll introduce it a little bit further.If we move to next slide, Slide 5. We have a strategy that we have essentially been following for the last 10 years. We provide digital solution to several different customers and different sectors. We create growth by -- over time by acquiring new companies and actually supporting our subsidiaries to drive organic profit growth. We acquired mainly complementary businesses. We are looking for value-based leadership, and we tried to do our acquisitions at attractive valuations.And then organic growth is mainly handled in the divisions, and we believe in a decentralized responsibility and authority structure. We give strategic support to our companies. And we look for synergies, collaboration where possible. That has made it possible for us to have a compound annual growth rate of about 15% in the last 15 years and above our group target rate of 10%. And we have a target for our EBITDA margin of 10%, and we almost made that in 2019.And that's year-on-year on, that means that we have been able to double our business every 5th year, the last couple of years ago. So that's sort of our aim. And that made it possible for us to be the Europe's leading provider of software and services for design and engineering activities. Market-leading for digital BIM collaboration solutions, a leading provider of facility management software and a market leader for document in case handling solutions for the public sector in Sweden.So if we move to Slide 6. Our operating structure is 3 divisions. We provide software and digital solutions. In 2019, we had a net sales of SEK 3.4 billion. And as I mentioned before, approximately 10% of EBITDA profit margin design. The 3 divisions are Design, PLM and Process. In Design, we are 3 companies, Symetri and Excitech, who are world leader within Design and BIM software and the partner to Autodesk. Tribia providing BIM collaboration solutions and Service Works Group that provides facility management software.In PLM, we also provide design, simulation, product data management and the product life cycle management solutions. And we are a partner to Dassalut, and that's the company that then the brand is Technia. Process management is our third division, mainly providing software and digital solutions to the public sector in Sweden. And we do that in 10 different companies.So if we move to Slide 7. Addnode Group, we are an international group. We are -- our operations are in 19 different countries. We are predominantly active in Northern Europe, but we have an international offering.So moving on to Slide 8. What we would like to cover today is a short introduction and summary to Q1 2020, elaborate on the group performance in Q1 and then go further into our 3 divisions. Also provide some insights on our financial position and also give some insights and provide you some more details about how we are handling the COVID-19 pandemic.So moving to Slide 9. Q1 was a very strong start to challenge year. As the Group has never before had a single quarter where we have had higher net sales or EBITDA. The growth rate was quite fantastic, and Lotta will tell a little bit more about that on the next slide. But before that, we can see that we had a small effect on the COVID-19 in the first quarter, and -- but we will see that it will have an effect going forward. And we'll discuss a little bit more on that. And we have taken measures to handle that, and we will elaborate on that as well.But before we do that, let's move to Slide 10, and I will hand over to Lotta, who will elaborate on the Group performance.

[Lotta Jarleryd, Chief Financial Officer]

Thank you, Johan. I will -- let me start with giving some comments to the P&L for the first quarter. Net sales increased to SEK 1,234 million. That was a total growth of 44%. 10% was organic growth and currency adjusted growth was 9%. The growth is mainly driven by the strong growth in division Design. Based on the Q1 numbers, we now have a rolling 12-month net revenue of SEK 3,810 million. EBITDA for the period was SEK 180 million. That was an increase by 32% from last year. That gave us an EBITDA margin of 8.8% compared to 9.6% last year. Division Design and division Process showed both a good growth and a good earnings improvement during the quarter. While division PLM was hurt by challenging market conditions and too high costs in relation to the lower rate of growth.That gives us earnings per share of SEK 1.71 compared to SEK 0.45 in previous year. Then I turn to Page 11. As I said before, the revenue growth was 44%. And out of that, recurring revenue constitute the largest part. And we had an increase of 62% in the quarter from SEK 545 million to SEK 882 million. Recurring revenue then accounted for 71% during the quarter, and that could be compared to 64% previous year. We have 7 percentage units increase compared to last year.And this high proportion of recurring revenue gives us a stability in a very uncertain times that we have now. I turn to Page 12. Thank you. Back to Johan.

[Johan Andersson, President & CEO]

Thank you, Lotta. Going a bit deeper down into division Design Management. It was a very strong quarter, posted a near doubling of net sales, 95% during the first quarter and the net sales to SEK 722 million. Organic growth was strong, 24%, adjusted for currency effects, the organic growth was 23%. And what added also to the growth was the acquisition of Excitech that we did in January in this quarter.And I will give you some more insights on that later. But in total, it was a very strong quarter. EBITDA almost doubled and was SEK 76 million compared to SEK 43 million last year. The demand for the Autodesk offering in the company Symetri with our own complementary products and services as well was very strong, both in the U.K. market and the Nordic market, especially in the AEC segment. Excitech, that I mentioned, that was acquired in January is also added to that.The offering on proprietary software surrounding demand collaboration portals was stable. And the share of our recurring revenue in this division increased further from 81%, 86%, predominantly driven by the acquisition of Excitech and also the good growth in Symetri. We soon was able to secure several new agreements with customers such as Atos, Clancy Consulting, Flexlink, Greenwich University, Heathrow Airport and some regions in Sweden with regards to the facility management offering.So in total, a very strong quarter for the division. And in this division, we have not yet seen any effects of the corona in this quarter, but we can see that there will be effects going forward as there are, especially in the oil and gas sector and also from the part that is doing business with the discrete manufacturing partners well.So we are expecting that we will be affected in Q2 and going forward on this. But we also have some business that we are expected to be stable. And I think it's important going forward to see who is the customer's customers. Because there are customers here in the public sector as well. So with that, I would like to move forward to the next slide, Slide 13. And I said -- explained earlier on, a big part of our strategy is to do value-added acquisitions of complementary offering. The acquisition of Excitech meant that we were able to -- so we're able to do any further more business with regards to our Autodesk offering. We have a very strong offering in the Nordic countries with the company Symetri.We have since 2013, being building in the U.K. as well. And now we were able to acquire Excitech, meaning that we will be the leader in both the Nordic countries and in the U.K. market. And there are synergies as well on both the services side. And we will be able to get a bigger stage channel for our own propriety software that are in combination with the Autodesk products.And so far, that started out well. And then we all know that we will have the effects of lockdown and the corona, but looking to Q1 and the start of it, it has been very good. Also did an acquisition of a small company called Unizite. It's more of a technology acquisition, meaning that we are adding to our BIM portfolio, and this is a product we're able to both sort of get the information from the construction side into the digital systems that we are providing, but also the other way around providing the information on-site from our system.So it's a technology offering that adds to our portfolio. So that's just an example of the type of acquisition that we're doing. So with that, I would like to move on to Slide 14, give you some insight on the PLM division. Net sales increased with 4%. The organic growth was still negative. And adjusted for currency effect, it was 3% negative. And we had a decrease of EBITDA to SEK 10 million compared to SEK 90 million. We have been hit by the recession in Germany and cutback in the automotive and manufacturing industries to reduce the customers' willingness to invest.And we said that we could only see some small implications of the corona in the first quarter. And here, in this division is where we have seen those small effects. So as you all know, we have an impact from the automotive industry in both England and Germany. So -- and that has sort of been manifested as well going forward with the corona. And -- but then we have -- still some good growth in the Nordic countries in Benelux, where our demand for consulting services and simulation solutions are still stable.And we are working with adapting the organization, and we will continue to do that as part of our mitigation of the COVID-19 pandemic. We were able to land some new customers as well from doing with B. Braun, EDAG doing services to Arla Foods as well, Koenigsegg Automotive. Who's Husqvarna, Lehto Group, Stadler Rail and Vanderlande Industries. So we're still doing business, but it's a much tougher market. And if we move to the next slide, Slide 15. I guess we'll give you an introduction to that. In this slide, today it's very clear that if you're able to work distributed and on a digital way, then you can sort of reach your customers as well. So next week, Technia is hosting a fully virtual customer event with presentations, live session and speaker, reaching out. So this is the major PLM event this quarter because I think it will be the only one in the world at this section because everything else has been canceled. And we are doing it virtually instead.So if you're able to join, please go to Technia's website. And I think you were able to get an insight on that. And it will be opened by the Dassault Systèmes Chairman and Vice President, Mr. Bernard Charlès, who will give an introduction to that. So it will be a good session. And it will be a good example of how we are able to reach our customers in these times. Stronger recommend that.So moving to Slide 16. The Division Process Management had a very strong Q1 was able to land an organic growth of 2% and a growth of 6%. And we also increased the margins from 14.9% to $16.9 million. Our digital solution for case management for authorities and state agencies in Sweden for -- had a very good quarter. We were also having good situation with our system for health care activities. And here, we're also working with pharmacies. So this is one of the divisions that we are expecting a fairly stable situation compared to the situation that we have in the world in 2020. And we were also able to land some new customer agreements with the Swedish Energy Agency, Höglandsförbundet, the City of Mölndal, the local municipalities. And the majority of the customer base is the Swedish public sector, local authorities, local municipalities, state agencies, working with case management systems, planning system for the infrastructure in the local municipalities. So a very strong quarter from process management. So moving to Slide 17. I just wanted to give you an example of how the companies in division process management are able to help our customers in these times. One of the customers that they are working with is a company called Dynamic Code who are providing different type of testers. They are using, and we are providing them with our IPEX-based case management system. And having that as a motor, they have been able to set up new system in a fairly short time to be able to provide COVID-19 tests in his lab.So it's just an example of the type of customers that we are able to serve in these times. So moving on to Slide 18. I would like to hand it over to our CFO, Lotta Jarleryd.

[Lotta Jarleryd, Chief Financial Officer]

And thank you, Johan. As a consequence of the uncertainty regarding the pandemics' progression, the Board of Directors decided to withdraw the previously communicated proposal for dividend of SEK 2.50 per share. And instead propose that no dividend will be paid for 2019. This was communicated on March 30.Turning to Page 19. I would like to give you some highlights on the condensed balance sheet. As you can see from the table, there was an increase of intangible fixed assets. During the period and also from the year-end, and that is predominantly relating to the purchase price allocation from the acquisitions of Excitech and Unizite. And that, of course, correlates to the increase in long-term -- short-term liabilities. We have paid one charge so far, and that was financed through our credit facility, and we will make the second payment by the end of June.In terms of accounts receivables, we have not seen any changes in the customers' willingness to pay so far. And in terms of cash, you can see that we have a very strong cash position by the end of March, SEK 559 million. And there is a considerable increase from year-end. And as many of you know already, the first quarter is the best quarter in terms of cash generation. Since we have a lot of renewal of maintenance agreements paid during the first quarter. I would also like to mention that the net debt is SEK 175 million by the end of the quarter. And that is, thanks to a strong cash position, of course. And during the quarter, we have also increased our credit facilities by SEK 250 million. And we haven't used any of that yet, which you can see that we have an unutilized credit facility of SEK 510 million by the end of March.

[Johan Andersson, President & CEO]

Lotta Jarleryd, probably should mention that Excitech is fully consolidated from January 1.

[Lotta Jarleryd, Chief Financial Officer]

That's correct. Turning to Page 20. Here, you can see the operating cash flow for the quarter. And as said before, it was very strong, and it was SEK 50 million more than the corresponding quarter previous year. And besides the large share of maintenance contracts being invoiced and paid during the first quarter. We also had a good earnings performance, of course, that contributed to that cash flow.Turning to Page 21. I'm handing over to Johan again.

[Johan Andersson, President & CEO]

Thank you, Lotta. Just want to elaborate a little bit on what actions we are taking and our positions with regards to what is happening with regards to the COVID-19. I would like to say, looking at Lotta just mentioned and discussed our balance sheet. I think we are well equipped, both operational and financial, to handle this. Of course, we had an initial focus on our employees, help us successfully change over to homework routines. We are, as I mentioned before, we are active in 19 different countries. Some of them are in lockdown. In Sweden, we are fortunate to be able to sort of move on in a fairly probably weighed, but there are countries that are more in the lockdown, and most of our employees are working from home. And I would like to say that are working very well.We are acting -- optimizing where we can enhance ourselves, and we are adapting our capacity and cutting cost with a focus to be able to retain our confident employees during a time of weaker demand. Meaning that we have a planning and I think most of it are planning for a Q2 effect and an effect in Q3, and we are going for a better Q4.There will be some employees that we will unfortunately have to give a notice. But most of this will be handled through different short-term working programs, furloughs, reduction in working time, salary cuts, fewer consultings and general cost cutting. The easiest one being travel. And we will see an effect from that in the second quarter and going forward. I think it is important to understand for you who are new to the Addnode Group that we are a diversified business, and I believe this is a strength in the times going forward. As I mentioned before, demand, we are expecting it to be relatively stable in the Process Management division with the overwhelming majority of the customers in the public sector in Sweden. Meaning that we don't expect that they will cut the use of the software.So that will be fairly same going forward. In the Design Management, PLM divisions who are more active towards sort of the classic industry sectors, meaning discrete manufacturing, automotive, oil and gas, et cetera. So that we are expecting new sales to be impacted. We still have a lot of recurring revenue. And a lot of that has been prepaid in the first quarter, but we're expecting a new sales of licenses of software and also new sales of services and recurring revenues that will have an impact on the business going forward.And we are mitigating that with furloughs, and I mentioned with the reduction in work time in salary cuts. And of course, we are actually looking at it, and we will add up the situation as it moves on forward. But I think we are as prepared as we can be for this situation, and we are analyzing it going forward.So with that, we are looking at questions. And there are some questions that have been put forward here. And Lotta?

[Lotta Jarleryd, Chief Financial Officer]

Okay. So the first question is what was the reason behind the significant increase in recurring revenues?

[Johan Andersson, President & CEO]

If I will start with that. The impact of that is, of course, the acquisition of Excitech that we did in the first quarter. And Excitech has a business model with the majority of the sales and the income going forward is recurring revenue. So the acquisition of that added to the existing portfolio of recurring revenue that we have. And then we also had a growth in Symetri, who has a similar offering as Excitech by itself. So we're both an organic growth in Symetri, but the majority of the explanation is that we acquired Excitech, who has a business model with a lot of recurring revenues. So that's the majority of that.

[Lotta Jarleryd, Chief Financial Officer]

Question number two. What was behind the very strong margin uptick in Process management?

[Johan Andersson, President & CEO]

Process management has several different companies organization on that. But we could see that we were able to have very strong demand with regards to case management systems to the public sector and that added to that. And that was predominantly with our sort of more consulting offering base, tailor-made made solutions there, who had a very strong impact. And also -- basically -- as process management are several different companies as all those companies are able to deliver good quarter, then -- the whole division will have a good quarter.So it's also an effect of the utilization rates, meaning that they have run a very efficient organization in Q1, and that shows in the number and the uptake in the margins.

[Lotta Jarleryd, Chief Financial Officer]

And question number three. Any seasonal effects in Excitech making a strong Q1 or is that the underlying growth rate you saw?

[Johan Andersson, President & CEO]

We have -- it's not that much of a seasonal effect. You have both like we discussed here. So some good underlying growth. And then we'll have some effects of the 3 year deals. You have -- for those of you who have been following us, you know that in Q2 last year, we saw an uptick in the business model where we were able to sell more 3 year deals. And now we have sort of gone full year, full circle. So we still had an effect of that in Q1 as well this year. But we also have a good underlying growth and those 2 together was able to generate this very strong organic growth.We don't expect that we sort of can have a 20% organic growth in this organization. So it's both sort of an effect of selling a lot of 3 year deals, but also good underlying growth. So there's definitely a good underlying growth. But as we have mentioned before, we can't expect that we can have a 20% organic growth going forward. If you sort of put aside the corona effect, the organic growth in this business, we have -- it's something new, we expect it around 5%. That's a good organic growth. And then we sort of have one -- more of the effect of -- right now, we are able to do good business, and we are selling a lot more 3 year deals.

[Lotta Jarleryd, Chief Financial Officer]

Next question. What is the share of recurring revenue in Excitech, looks like almost 100%?

[Johan Andersson, President & CEO]

Not almost 100%. It's -- I would say less. So it's -- we haven't given that. So it's not more than we are having for the whole division. It's actually a little bit less. So yes, just to give you a number on that.

[Lotta Jarleryd, Chief Financial Officer]

Next question is, can you comment on how the first 3 weeks of April have started growth -- has started growth-wise in your 3 divisions.

[Johan Andersson, President & CEO]

The short answer is no. But still -- to give you an insight, we can see that we will have an effect from the corona. And as we mentioned, we have been very clear on that. We can see, for example, education. We do a lot of education with regards to the use of our software due to travel restrictions and that will saw later on their sort of the basic training is not there yet. And we can also -- the new sales takes a little bit longer. So as we mentioned, if we put the division Processes aside and if we look at Design and PLM, we can see the effect there. And we were able to see it in the sort of in the last part of the first quarter, and we can see there's an effect in new sales, as I mentioned, with regards to what we are expecting.So people are not -- there are no cancellation of the existing contracts, but this new sales that we are seeing an effect on.

[Lotta Jarleryd, Chief Financial Officer]

Next question is are your recurring revenue in Q1, defined in such a way that they will remain at that level into Q2 as well.

[Johan Andersson, President & CEO]

We can't make any promises on that. It has to do with -- there are -- most of them are renewed on a yearly basis. And as you can see in our cash flow, the most -- the majority of the renewals are being made in Q1, meaning that they are actually paying for it. But as you we along, gone over the year, there are renewals as well in Q2 and Q3 and Q4.So it will -- we'll have to wait and see, to be very honest. It depends on how our customers are. If they believe that this will sort of pan out in a couple of months and we have effect, we can probably expect that they will not cancel the contract. If the customers believe that this will take years, we can probably expect cancellation. So it's a little bit of wait and see, but we haven't seen any cancellation so far.

[Lotta Jarleryd, Chief Financial Officer]

Okay. Next question. We have commented a little bit on that before. Is there a significant positive impact from 3 years licenses in the growth figures for Design Management?

[Johan Andersson, President & CEO]

I was a little bit discussing one of the earlier questions, but yes, there's an effect in Q1 from the 3-year deals in Design Management.

[Lotta Jarleryd, Chief Financial Officer]

And next question. Excitech is to do a very solid quarter in terms of both sales and margins or there are the reasons behind that? Is there a significant seasonality effect? Is the combined Symetri-Excitech offering already paying off?

[Johan Andersson, President & CEO]

To answer that question, we can say that the same, Excitech is doing a good quarter. Yes. It's not that much of a seasonality effect. We consider -- we're so strong in momentum from 2019 moving into 2020 in the Q1. Most of their customer base are in the AEC sector. And that continued to do good business. We -- with regards to the rest of the Design Management, we can see that they will be affected in Q2 as well going forward. We're expecting that with regards to new sales for Q1 was very good. There were some 3-year deals effect there as well. So it's not so much seasonality. They had a good underlying growth, but there are also a 3-year deal effect as well.

[Lotta Jarleryd, Chief Financial Officer]

Do you want to comment upon the -- is the combined Symetri-Excitech offering...

[Johan Andersson, President & CEO]

Yes. They're combined. The combined is doing as -- both Excitech and Symetri team are excited about doing it and working it together. But we haven't seen that in the financial figures yet, meaning that we are doing more business together. That is yet to come. And of course, with all this travel restriction, it's not put on hold, but we are not able to do as much as we would like, but it's a very well-run business. So -- and so then -- so the effects of the combined Symetri-Excitech is coming.

[Lotta Jarleryd, Chief Financial Officer]

And next question. Could you give us some round numbers regarding the expected impact on nonrecurring revenue in Design and PLM sales from COVID-19 for Q2 and Q3.Is it 10%, 30% or even more percent?

[Johan Andersson, President & CEO]

It's a very good question, but I'm not able to answer that. We're not -- fundamentally, we are not giving any financial prognosis and also in the situation where we are right now, it's very tough to answer. And it all depends on how our customers are acting with regards and how they are affected going forward. So no, I'm not able to answer that question.

[Lotta Jarleryd, Chief Financial Officer]

That was the last question.

[Johan Andersson, President & CEO]

Okay. Thank you all for taking the time to listen to our Q1 presentation. And with that, I would like to end this session, and thank you from me and Lotta.

[Lotta Jarleryd, Chief Financial Officer]

Thank you very much.

[Johan Andersson, President & CEO]

Goodbye.